Performance of the Australian Securities and …...placing too much reliance on brokers to assess...

Chapter 5

ASIC's role and credit providers

5.1 Before July 2010, the states and territories had primary responsibility for

regulating consumer credit. ASIC, however, did have some involvement. Since

March 2002, under the ASIC Act, the regulator has had a consumer protection role for

credit facilities, which included household and investment and small business credit.

ASIC took over this responsibility from the ACCC as part of the reform of business

and investment regulation under the Corporate Law Economic Reform Program.

This Commonwealth level regulatory function for credit in the marketplace was

limited in scope with ASIC's jurisdiction under part 2 of the ASIC Act confined to

broad standards of conduct covering unconscionable conduct and misleading or

deceptive conduct.1 ASIC's licensing powers did not extend to brokers who only

advised on credit products. At that time, as credit was not considered a 'financial

product' for the purposes of the Corporations Act, brokers were not required to have

an Australian financial services (AFS) licence.

5.2 In July 2010, ASIC's responsibilities expanded considerably under the

National Consumer Credit Protection Act 2009 (National Credit Act) which imposed

licensing requirements, general conduct obligations and responsible lending

obligations on credit providers and persons providing credit assistance.

5.3 In this chapter, the committee's main focus is on ASIC's performance and its

regulatory role before the National Credit Act came into force. It is concerned with

allegations of imprudent lending involving unconscionable conduct, misleading and

deceptive conduct, including possible cases of fraud, that occurred after March 2002

but before the new legislation came into effect.

Early indications of irresponsible lending practices

5.4 The period from the late 1990s through to the first half of the 2000s was

marked by considerable product innovation in the Australian mortgage market.

Reflecting on that period, the Assistant Governor (Financial Markets) of the Reserve

Bank of Australia (RBA) explained that lenders sought to cater for a wider range of

potential borrowers and found new ways to assess their borrowing capacity. He noted:

Lenders introduced home-equity loans, redraw facilities and reverse

mortgages, all of which allowed households to borrow against the equity

they have built up in their homes. Lenders also introduced interest-only

1 See for example, Consumer Credit Legal Centre (NSW) Inc, A report to ASIC on the finance

and mortgage broker industry, March 2003, p. 39; ASIC, Protecting wealth in the family home:

An examination of refinancing in response to mortgage stress, March 2008, p. 4; and ASIC,

Submission 45.1, p. 6.

loans and shared equity loans, which made it easier for households,

particularly first home buyers, to purchase their home.

Loan products that better meet the needs of certain types of borrowers, such

as those with irregular income streams or those who do not meet the

standard lending criteria, were also introduced. Low doc loans, for which

borrowers self-certify their income in the application process, accounted for

about 10 per cent of newly approved housing loans in 2006 compared with

less than ½ per cent in 2000.2

5.5 According to the Assistant Governor, while the overwhelming effect of these

changes had been to widen the range of households who could access finance, some of

the innovation had resulted in 'an easing in lending standards and an increase in risk

for both borrowers and lenders'.3

5.6 The Consumer Credit Legal Centre (NSW) Inc (CCLC) also noted the

emergence of 'non-conforming lending' in the home loan market during the early

2000s. It stated that 'while some lenders specifically targeted and priced their products

for marginal borrowers, the trend soon spread into the mainstream, with most

mainstream lenders including the major banks offering low doc loans'.4

Growing use of mortgage brokers

5.7 This period also witnessed growth in the use of financial brokers as

intermediaries between borrowers and lenders, which meant that an increasing number

of Australians approached mortgage brokers rather than a lender to arrange loans.

For example, a 2003 survey by the Australian Prudential Regulation Authority

(APRA) on broker initiated loans recorded that 56 institutions indicated that they had

used brokers to originate loans (14 banks, 34 credit unions, and eight building

societies), which represented approximately 25 per cent of all authorised deposit-

taking institutions (ADIs). The survey also predicted a continuation of this trend in the

market with 25 institutions indicating at the time that they planned to use brokers for

the first time in the next 12 months.5

5.8 Based on its results, the survey noted that only a minority of institutions were

placing too much reliance on brokers to assess loans and inadequately tracking and

2 Dr Guy Debelle, 'The State of the Mortgage Market', Address to the Mortgage Innovation

Conference, Sydney, 30 March 2010, p. 6.

3 Dr Guy Debelle, 'The State of the Mortgage Market', p. 5.

4 Consumer Credit Legal Centre (NSW) Inc, Submission 194, p. 13.

5 Anoulack Chanthivong, Anthony D. F. Coleman and Neil Esho, Report on Broker-originated

Lending, Results of a survey of authorised deposit-taking intuitions, undertaken by the

Australian Prudential Regulation Authority, January 2003, pp. 4, 5. The survey recorded that

the total dollar value of broker-originated housing loans was $76.3 billion, which represented

roughly 23% of all housing loans made by ADIs. Broker-introduced housing loans accounted

for 23% of banking industry housing loans, 2% of credit union housing loans, and 35% of

building society housing loans.

assessing broker-introduced loans. Even so, it cautioned that independent loan review

was necessary to ensure an ADI's credit standards were 'being applied to assess and

approve loans'. It advised that an independent review should be 'a fundamental

element of risk management'.6

5.9 The survey also covered broker remuneration. It found that over half of the

institutions (53 per cent) based the broker's remuneration solely on the volume of

business generated. According to the survey reviewers, this provided brokers with an

incentive to generate loan volume without appropriate regard for risk. Again, the

reviewers observed that with such an incentive structure it was critical for ADIs

to have procedures in place to ensure their own credit assessment standards were

applied rigorously to broker-introduced loans.7 Looking back over this period, the

CCLC stated that:

Brokers carried none of the default risk worn by lenders and had a strong

financial incentive (in the form of commissions) to get as many and as big a

loans as possible accepted by the financial institutions and other lenders.

The presence of the 3rd party in the transaction also allowed the lender

(keen to grab or retain market share) to distance themselves from the

transaction and to either genuinely miss, or effectively turn a blind eye, to

irregularities in loan applications.8

5.10 As noted previously, ASIC assumed Commonwealth-level responsibility for

consumer protection in the credit market in 2002 at a time when the use of mortgage

brokers was on the rise and lending practices were easing.

Early warning signs

5.11 During the early 2000s, community advocates and caseworkers began

to express concerns about the growing incidence of complaints involving brokers.

Their experiences led them to conclude that the industry was lightly and unevenly

unregulated and contained some high-risk players and unfair practices.9 In response to

the increasing number of complaints involving brokers, ASIC, on the recommendation

of its Consumer Advisory Panel, commissioned the CCLC to examine and report on

the mortgage and finance broker industry.

Increasing concerns about broker conduct

5.12 Consistent with the findings of the 2003 APRA survey, the CCLC also

registered some troubling trends about this poorly regulated sector of the industry.

6 Chanthivong et al, Report on Broker-originated Lending, p. 7.

7 Chanthivong et al, Report on Broker-originated Lending, p. 9.

8 Consumer Credit Legal Centre (NSW) Inc, Submission 194, p. 13.

9 Consumer Credit Legal Centre (NSW) Inc, A report to ASIC on the finance and mortgage

broker industry, March 2003, www.asic.gov.au, p. 5.

www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Finance_mortgagebrokers_report.pdf/$file/Finance_mortgagebrokers_report.pdf

Its report identified a number of features that hindered the development and

maintenance of professional standards for broker conduct, including:

minimal or no entry requirements for participants in the industry;

the use of commissions as the dominant method of remuneration for brokers;

a shift in distribution channels used by lenders from branch networks to

brokers, with lenders competing against each other to gain access to broker

client bases, through increasing the commission they were prepared to pay to

brokers;

a consequent shift in the preparation of loan applications from lenders to

brokers, with some brokers prepared to provide inaccurate information about

the financial circumstances of their clients, in order to ensure that loan

applications met the acceptance criteria of the lender;

difficulties for lenders seeking to discipline brokers, due to the capacity of

brokers to switch the lender to whom they directed client applications for

finance;

a lack of accountability of brokers for poor advice due to the inability of

consumers to access alternative dispute resolution forums; and

some brokers not properly promoting the interests of their consumer clients.10

5.13 The report recognised that consumers were relatively inexperienced when

using brokers and, given the confusing range of loans and providers, could become

dependent on brokers for advice. Importantly, the report noted that some brokers were

'prepared to exploit that dependency' and that a number of fringe players in the broker

industry systematically adopted unfair practices, and pursued 'their own financial

interests over those of their clients'.11

It cited cases involving disputes about the

quality of advice provided by brokers which included:

brokers recommending interest only loans in inappropriate circumstances—

case studies indicated that some brokers were making widespread use of

'interest only' loans;12

brokers misrepresenting the savings available from changing a home loan;

brokers arranging for borrowers to declare, incorrectly, that a loan was for

investment rather than personal use (with the result that the consumer lost

statutory protections provided under the Uniform Consumer Credit Code

(UCCC));

10 CCLC, A report to ASIC on the finance and mortgage broker industry, March 2003, pp. 6–7.

11 CCLC, A report to ASIC on the finance and mortgage broker industry, March 2003, pp. 8, 11.

12 CCLC, A report to ASIC on the finance and mortgage broker industry, March 2003, p. 30.

3

brokers charging excessive fees, or fees in circumstances where the broker

was aware that there was little prospect of the borrower being approved for

a loan;

borrowers being placed into a loan where they could only afford the

repayments with substantial hardship (81 per cent of the caseworkers

surveyed by the CCLC who dealt with broker complaints indicated that they

often saw problems of this type); and

brokers arranging finance for an amount less than that requested by the

customer (particularly where the funds were required to complete a property

purchase).13

5.14 The report noted that these practices resulted in 'higher costs to consumers,

an increased risk of default by the borrower, and exposure of their home where this

was used as security for the debt'.14

It also suggested that most consumers would be

unaware that by signing a declaration that the loan was for investment purposes, and

therefore outside the UCCC regime, they made it significantly easier for the lender

to take possession of any security, such as their home, in the event of default'.15

The report drew particular attention to a most troubling practice:

A significant and, from a regulatory viewpoint, disturbing trend in the

broker industry is the incidence of fraudulent mortgage applications. The

shift in responsibility for the preparation of the loan application from

persons such as bank employees to brokers has seen a shift in the interests

of that person, from applying proper risk assessment techniques to earning

commissions through having the loan approved. Increased reliance on

brokers therefore creates an increased risk of this type of mortgage fraud.

At the soft end, mortgage fraud can involve the broker misrepresenting the

consumer's personal or financial information in order for the lender to

finance a marginal application for credit. Because brokers have ongoing

contact with a credit provider, they become familiar with its lending criteria

and can manipulate the content of applications to ensure the loan will be

approved. There are a number of ways in which the broker can camouflage

the borrower's circumstances, such as not disclosing all liabilities, reducing

the number of dependants, or inflating the value of assets.16

5.15 The report recognised the urgent need for the implementation of interim

measures to protect consumers and improve standards of conduct in the broker

industry, which included:

increased and visible enforcement action by regulatory agencies;




16 CCLC, A report to ASIC on the finance and mortgage broker industry, March 2003, pp. 34–35.

the introduction of improved codes of conduct by industry bodies together

with greater monitoring and enforcement of their obligations;

improved access to industry-based dispute resolution procedures such as the

Mortgage Industry Ombudsman Scheme, and ASIC approval (pursuant to

Policy Statement 139) of the operation of such schemes, in order to provide

greater transparency in the operation and decision-making practices of these

schemes; and

state and territory governments encouraging a greater degree of supervision of

brokers by lenders…17

5.16 A 2003 APRA discussion paper also highlighted the increased use of brokers

and recognised that some ADIs were relying on broker valuations and income

checking when providing a loan. Instead of verifying the information, certain ADIs

were placing greater weight on the security underlying the loan than the ability of the

borrower to repay the loan.18

The paper referred to a particular problem with low doc

loans19

where the potential borrower did 'not provide income details', and the lender

did not 'verify the borrower's self-declared income levels and/or self-declared

servicing ability'.20

5.17 Clearly, by the close of 2003 some persistent and undeniable alarms were

warning of dubious lending practices and the potential for them to spread, especially

with brokers receiving commissioned-based remuneration and with the increasing

availability of low doc loans.

5.18 Commentary on, and concerns about, the role and conduct of brokers

continued for the next few years. According to the RBA's September 2004 Financial

Stability Review, brokers typically received upfront commissions from lenders for

each loan they originated. It observed that most lenders also paid brokers ongoing or

trailing commission over the life of the loan, which were generally 'small relative to

upfront commissions'. The Review noted that this created some incentive for

borrowers to periodically refinance with a different lender.21


18 APRA, Proposed Changes to the Risk-Weighting of Residential Mortgage lending, Discussion

paper, November 2003, p. 2.

19 A loan that requires less financial documentation than that required for other loans. Primarily

for borrowers who do not meet the standard loan application criteria, such as the self-employed

and other borrowers whose income could not be readily verified.

20 APRA, Proposed Changes to the Risk-Weighting of Residential Mortgage lending, p. 4.

21 Reserve Bank of Australia, Financial Stability Review, September 2004, pp. 39–40.

5.19 In 2007, the RBA reported that mortgage brokers in Australia had been under

discussion for some time. It explained:

In part, this reflects concerns that a small number of brokers may have been

associated with predatory lending practices and that their remuneration

structures—predominantly high upfront and low trailing commissions—

might have adverse consequences for both borrowers and lenders.22

5.20 In September 2007, the House of Representatives Standing Committee on

Economics, Finance and Public Administration tabled a report on home loan lending.

Although the report noted the positive results stemming from changes in the housing

lending market, it also referred to negative aspects, including instances where lending

had been inappropriate. The report cited the concerns of the Credit Ombudsman

Service, which had identified:

…a disturbing trend among some lenders, normally fringe lenders, to

refinance home loans in circumstances where the borrower has no capacity

to repay the loan. These lenders rely solely on the value of the security, not

the borrower's ability to meet the repayments. The borrower is invariably in

default of their existing loan and is at risk of losing their home.23

5.21 The House of Representatives' committee recommended that the

Commonwealth take responsibility for regulating credit including mortgages.

5.22 By 2008, widespread support for reform was mounting.24

In March 2008,

the Council of Australian Governments (COAG) agreed in principle to the

Commonwealth taking over the role of regulating mortgage credit and advice

to protect consumers. The states' agreement to refer constitutional powers to the

Commonwealth paved the way for the introduction of the Consumer Credit Protection

Reform Package.

Committee comment

5.23 Prior to 2008, ASIC had been aware of emerging problems in the mortgage

brokering industry, including predatory lending and the potential for it to grow. As the

years passed, the trend continued but the push for reform was not sufficiently strong

until 2008 when agitation for legislative change gathered the necessary force

to compel reform. Before the committee considers the effectiveness of the reforms,

it examines ASIC response to the problem of predatory lending as it crept into

mainstream lending after 2002.

22 Reserve Bank of Australia, Financial Stability Review, September 2004, p. 40.

23 See House of Representatives Standing Committee on Economics, Finance and Public

Administration. Home loan lending, Inquiry into home loan lending practices and the processes

used to deal with people in financial difficulty, September 2007, Parliamentary Paper

No. 191/2007, p. 24.

24 Productivity Commission, Review of Australia's Consumer Policy Framework, Vol. 1, No. 45,

30 April 2008, p. 28.

ASIC's response to lending practices

5.24 In the following section, the committee looks closely at the nature of this

predatory lending, the effects it had on individual consumers, and why, despite the

warnings, such practices were allowed to continue. While the committee

acknowledges ASIC's limited regulatory function over the provision of credit during

this period, its focus nonetheless is on the measures that ASIC could or should have

taken to arrest the trend in predatory lending and to protect the interests of retail

borrowers.

Previous inquiry

5.25 The committee has previously inquired into poor lending practices as part of

its broader 2012 inquiry into the post-GFC banking sector. It took evidence from

people claiming that they had been the victims of predatory lending. Ms Denise

Brailey, who headed up the Banking and Finance Consumers Support Association

(BFCSA), asserted that fraud and maladministration, especially related to low doc

loans was prevalent. The allegations were serious and went to matters such as the

falsification of application loans.25

5.26 During that inquiry, ASIC informed the committee that it had taken

enforcement action regarding low doc loans over a number of years and that it had 'not

identified widespread evidence of systemic misconduct in the banking sector along the

lines described by Ms Brailey'. At the time, the committee expressed its concern about

the obvious discrepancies between ASIC's account and Ms Brailey's claims of

predatory lending and fraud. It believed that the matter warranted further investigation

and that, upon receipt of allegations that presented an arguable case of wrongdoing,

ASIC should undertake its own investigations to establish whether a prima facie case

of fraud existed.26

5.27 Following this suggestion, ASIC wrote to Ms Brailey requesting the

documentation she had referred to that would support her allegations of misconduct.

ASIC obtained and reviewed the documents provided by Ms Brailey but considered

that the material did not provide evidence of any breach of the law by lenders.27

According to ASIC, additional information posted on the BFCSA's website did not

provide evidence of breaches of the laws administered by ASIC 'or indicate that any

of the credit providers were aware of, encouraged, or inserted misleading information

in application forms'.28

This current inquiry into the performance of ASIC provided

25 Senate Economics References Committee, The post-GFC banking sector, November 2012,

Parliamentary Paper No. 448/2012, p. 102.

26 Senate Economics References Committee, The post-GFC banking sector, pp. 105 and 107–108.

27 ASIC, Submission 45.1, pp. 28–29.

28 ASIC, Submission 45.1, p. 29.

another opportunity for people who have suffered loss because of poor lending

practices to recount their personal experiences.

Submissions

5.28 The committee received well over 160 submissions from people expressing

concerns about the conduct of brokers and lending institutions. Most provided their

own account of being caught up in poor lending practices and as a consequence losing

their family home, life savings, credit rating and in many cases their health.

A significant number of those who wrote to the committee were approaching

retirement or had retired. Their experiences align with those cited in the CCLC 2003

report and are consistent with the findings of APRA and the RBA around that time.

5.29 According to the BFCSA, older retirees and pensioners have been the

favoured target of white collar crime in Australia over the past two decades.29

In respect of irresponsible lending, evidence before the committee supports this

contention. For example, one couple, aged 71 and 64 years, had a loan of $900,000

approved. They asked how was it possible for the bank to approve such an amount for

'a 30-year term to people of our advanced age when we were Centrelink recipients

earning $23,000 per annum combined'.30

Another couple in their late 60s received a

loan of $360,000.31

These examples were not isolated cases of a person or retired

couple receiving an annual income of below $35,000 obtaining a considerable loan

over a 30-year term.32

One son noted that his father, on the pension of less than

$30,000 a year and, in his opinion, losing his faculties, was 'granted a loan of

$300,000 to invest in the stock market'.33

Another retired couple on the aged pension

obtained a loan in 2007 of some $415,000 on a property and $209,000 on their home.

They also received a $165,000 buffer loan 'to provide some portion of the deposits,

and then provide a bit of capital to assist the loans'. In 2009, they got another loan

from a different bank to refinance another property. They explained:

We are now aged 75 and 68 and face the very real prospect of losing our

home as we have no income apart from the pension. We have sold our

shares, a car, spent our invested money and, where we were in a fairly

sound financial position with assets over $1.5m we now have about

$250,000 in equity and this is declining and we have no prospect of any

improvement in our situation and find ourselves in an overwhelmingly

frightening position.34

29 Banking and Finance Consumers Support Association Inc, Submission 156, p. 5.

30 Ms Ann Marie Delamere, Submission 3, p. 1.

31 Name withheld, Submission 27.

32 See also Submissions 19, 25, 27, 103, 178 and 265.

33 Mr and Mrs Graeme and Nat Powell, Submission 8, p. 1.

34 Name withheld, Submission 55, p. 1.

5.30 Another couple informed the committee that:

…we are about to lose our family home and everything we have worked

towards for over 40 years to secure a self-funded, comfortable retirement.

Instead, we are broken mentally and physically and are now looking at a

life of dependence on the old aged pension and an unnecessary drain on the

public purse (the very thing we have worked our whole lives to avoid!).35

5.31 In their words:

We thought and trusted our 'Professional' Financial Planner, the Broker and

the Lender on the understanding that they operated under strict legislation

and Codes of Practice in 'a very stable Australian Banking System' as it was

explained to us at the time. This misplaced trust has destroyed our lives.36

5.32 The loan offers were directed at people who could borrow on the equity in

their home or other assets. According to one couple who were 'spruiked into buying

investment properties for their retirement':

…we were 58 years old, we were asset rich and income poor after 40 years

of hard work, we owned our factory premises our business and business

equipment, savings and we had a small loan on our house. The banks said

we could afford these low doc loans…These loans were never affordable,

our income was exaggerated, our assets were overstated, our rental income

was overstated. At 58 we got 30 year loans, we would have to work until

we were 90 years of age, there has to be something wrong. We used our

savings, everything we earned, buffer loans, selling our vehicles and

equipment and after 7 years of stress we cannot pay anymore, it was a

transferral of our wealth to the banks. This has happened all because we

placed our trust in the banks, and ASIC protects the banks.37

5.33 While consumers have a responsibility to attend to their own interests,

a number of submissions spoke of unconscionable or misleading and deceptive

conduct on the part of brokers and lenders. Welcome Australia Limited told the

committee of the deliberate targeting of asset rich–income poor 'Australians with

the intention of reaping financial gain that would invariably and knowingly lead to the

loss of the victim's home'. It referred to campaigns directed at retirees, many of whom

were living solely on the pension, enticing them to mortgage their homes 'while

offering them the world'. According to Welcome Australia:

The majority of these retirees have no idea as to the true picture of what is

actually taking place, for once they sign that contract the money begins to

flow, to the bankers, the financial institutions and the property speculators,

35 Submission 67 (Confidential).



while the investor/retiree begins to witness the dissolution of their asset,

their family home.38

5.34 Retired couples were not the only targets. One submitter stated that he was

55 years old and had recently lost his job; even though the submitter indicated in

writing that he was unemployed, he was successful in obtaining a $480,000 loan.39

Another was a newly widowed 56-year-old woman who was not working, receiving a

widow allowance and in poor health due to the stress and grief of losing a partner,

when she refinanced her mortgage with a major bank. She later discovered that her

income was recorded incorrectly in the loan application form and stated that, had she

been earning that amount, she 'would never have had a need for a mortgage'. Arguing

that the bank had taken advantage of, and defrauded, her, she wrote:

Now aged 64, no longer a home owner for the first time in 34 years, robbed

of a chunk of my rightful equity, not enough now to buy anything outright

unless miles away from family friends…40

5.35 A third case, but again only one of many, was a single mother who was

studying and working part-time. She had been fortunate to have received an

inheritance which had allowed her to buy her own home and to feel 'fairly secure'.

She then explained:

I was naive about investments and finances and believed what people with

experience told me. I was told by a broker that I should invest in property,

which I did with a low doc loan. I now clearly realise that I was never in a

position to be able to pay back a loan as I did not have the income. I now

have massive loans, no savings and have mortgaged my house. Life is now

a struggle month to month to pay the loans.41

5.36 A person on a disability pension, now forced to rent out her home and live at

her daughter's house, was among the many who wrote to the committee.42

In some

other instances, the banks approved unaffordable loans to people 'who could hardly

read and write' or who had a poor command of the English language.43

Disclosure

5.37 Many of the people who wrote to the committee were clearly hard working

Australians who over their lives had built up a nest egg so that they could support

themselves comfortably in their retirement. As one couple remarked:

38 Welcome Australia, Submission 230, p. 3.



41 Ms Kirsty Torrens, Submission 180, p. 4.


43 Submissions 52 (Confidential) and 183.

We have both worked all our lives in good jobs, paid our bills and our taxes

and raised our family, and had finally taken time out to relax when we were

approached with this bank scam. However, we were completely sucked in

by the scam and particularly when we were told the bank was the

Commonwealth which we had always associated with being a good

Australian citizen.44

5.38 Many asked the same question—how could they find themselves in such a

predicament? As one submitter put it:

How did I [end] up with $530K debt when I had no income when Low

Document Loan was approved to me…I will be facing a Bankruptcy as my

house is only worth $430K.45

5.39 For some, there was a definite sense that the banks had betrayed them.

One submitter, who referred to herself as 'a loyal customer of 35 years', did not

suspect that the bank would take advantage of long standing customers.46

5.40 Another common complaint involved the failure to inform the borrower about

the loan documents; important details of the loan structure; and how the loan

arrangements would or could affect the borrower's circumstances.47

A most disturbing

element, however, involved information contained in the loan application forms being

deliberately fabricated after the applicant had signed the documents or in some cases

signatures themselves being forged. Indeed, most of the people who wrote to the

committee about being the victims of predatory lending also referred to forged loan

application forms and the failure of the respective lending institution to verify the

information.48

Falsified information included: inflated income details; over-valued and

over-stated assets; fake Australian Business Numbers (ABNs); embellished

employment details; and false income tax details. For example, one couple listed the

anomalies in their application:

Our actual total income has been changed and in fact overstated by almost

$200,000, contrary to documented proof that was provided at the time, in

the form of tax returns and other official documentation.

No dependants included. In fact we have 2 children both at home, one at

school.


45 Ms Hifumi Robbie, Submission 15, p. 1.


47 Submissions 15 and 52.

48 Many submissions used their own experiences which taken together provided some sense of the

nature and extent of the practice. For example, see Submissions 3, 5, 7, 9, 12, 13, 14, 15, 16, 17,

19, 20, 21, 23, 24, 26, 27, 28, 32, 39, 48, 51, 52, 58, 64, 66, 68, 69, 71, 72, 93, 101, 104, 105,

131, 158, 171, 177, 183, 185, 195, 207, 218, 220, 221, 317, 320, 322, 351, 353, 378, 380, 381,

382 and 401.

The actual value of our assets has been changed and in fact overstated,

contrary to documented proof that was provided at the time.

The actual cost of our expenses has been changed and in fact understated,

contrary to documented proof that was provided at the time.

The actual cost of our expenses has been changed and in fact understated,

contrary to documented proof that was provided at the time, in the form of

official documentation.49

5.41 According to this couple, after they had signed and submitted the original

documents to the bank, changes were made to the loan application form by person or

persons unknown to them and without their authority, permission or knowledge.50

A 73-year-old self-funded retiree and a permanent carer to his son provided another

example that typified the range and extent of falsification of a loan application form:

My income was altered from about $34,000 p.a. to $75,000 p.a.

My 1999 Toyota worth about $6000 was valued at $25,000.

My employment record was false. I had retired in 1995 and since then was

never self-employed as a tutor as claimed falsely in the [loan application

form].

My superannuation and $325,000 in non-existent shares were fabricated.

I have never had an accountant or ABN as claimed.

A Family Trust was fabricated and I have never been a sole trader.

My home was overvalued by $100,000.

I had signed a different declaration. I never signed the affordability

statement/self-employment forms claimed to be held on file.51

5.42 Again the submitter told the committee that the bank had 'never checked

details with me to prove that I could service the loan'.52

Another couple told the

committee that they were 'absolutely shocked' to find that their details had been

'grossly falsified' and incomes 'hugely inflated'. They believed that the alterations were

made by the bank after they had signed the forms. They explained further:

We never had contact with the bank as this was done through a broker, if

the lender had made just one phone call to us to check that these details

were correct the loan would not have been approved and we wouldn't be in

this position.53

49 Name withheld, Submission 14, pp. 1–2.




53 Name withheld, Submission 27, p. 1. See also, Submissions 28, 36, 52, 66, 67 and 72.

5.43 For some, this practice was 'incomprehensible' and that no 'sane person would

have continued with these loans had they been aware of the level of tampering

required to get them approved'.54

One such submitter, who was receiving WorkCover

payments, told the committee that her employment details had been altered but that

the bank did not 'bother to collect any taxation returns to verify the income'.55

Another

submitter informed the committee that the bank had never contacted his father's

accountant to ascertain his financial position. He asked a question posed by so many

others:

Would it not be a financial provider's responsibility to perform at least the

most basic due diligence before providing a large loan to anyone, let alone

an 80 year old man?56

5.44 One couple remarked that while the bank never phoned them or made

inquiries into their ability to repay the loan, it did go 'to great lengths to get a

valuation' on their property.57

Another could not understand why banks could

undertake credit checks but not check income.58

5.45 The committee suspects that there are many other people who, too

embarrassed or disheartened by their experiences, have not come forward to reveal

their own stories of improper lending practices. Indeed, the CCLC told the committee

that it used to see such cases with 'alarming regularity'.59

5.46 Many of the people who contacted the committee spoke of their sense of deep

shame in succumbing to predatory lending. They felt humiliated and defeated by the

whole business, which commonly had dragged on for years, draining their energy,

damaging their personal relations as well as their physical and mental health.

One submitter spoke of the indignity in finding herself in such desperate straits:

I am ashamed of the position I am in because of bank approved low doc

loans, there is fraud and forgery on our low doc loans, these loans ought to

have been rejected, they were never affordable from the beginning, the

depression, the stress, the fighting with my family, all our life savings gone,

because of low doc loans.60



56 Submission 52 (Confidential). See also Submissions 67, 75 and 101.


58 Name withheld, Submission 72, p. 1. See also Mr Edmund Schmidt and Ms Cynthia Lawrence,

Submission 265.

59 Mrs Karen Cox, Coordinator, CCLC, Proof Committee Hansard, 20 February 2014, p. 42.


5.47 A 64-year-old pensioner who at first declined to accept an offer of a loan but

subsequently was persuaded to borrow a much larger amount than initially requested

summed up his situation:

I am the victim of a Low Doc Loan which has sucked my life away and

placed me on the brink of suicide. The poverty, sadness, despair and

hopelessness which have been caused by my attempting to keep up

repayments on a Low Doc loan which should never have been granted are

real, cruel and horrible.61

5.48 Another stated that, on reflection, he was encouraged to think beyond his

circumstances. He realised that a more prudent decision, which he started with, 'was to

purchase an affordable property but was convinced otherwise by an offer presented as

a 'sensible and tax effective way to increase my superannuation'.62

5.49 People spoke of having to live on the breadline just to try to repay the money

after having worked all their lives; paid their bills and taxes; and raised their family.63

The fear of losing their home was particularly alarming. One couple in their late 50s

stated they 'should be planning retirement not worrying constantly if we will have

a roof on our heads next week or next month'.64

One submitter, the sole carer of his

son, feared that there would be no financial support or home for him.65

5.50 Many borrowers who wrote to the committee also felt let down by ASIC.

They believed that the system was unjust and consumer protection non-existent.66

One submitter noted:

I am left thinking that a consumer purchasing a domestic refrigerator has

more consumer protection than a bank customer negotiating a loan over an

asset that's taken a lifetime to acquire.67

5.51 Another, who also argued that the Australian government appointed ASIC

to protect consumer interests against misconduct by the financial institutions, stated

that ASIC seems to be 'in bed with the banks'.68

In numerous cases, borrowers argued

they had mounted a strong case of maladministration in lending but that when they

contacted ASIC for assistance, it failed to act on their complaint in any effective

way.69

Mr Timothy Chapleo voiced a common view:



63 See for example, Submission 29.

64 Name withheld, Submission 21, p. 2. See also Submission 27.




68 Mr Spencer Murray, Submission 23, p. 1.

69 See for example, Submission 71.

If they cannot be of any real value in policing rogue business and large

organisations such as financial lenders and enforcing corrective measures

then what value are they in a role that should see them being able to have

some real ability to protect members of our society from unfair and bad

elements in business.70

5.52 The few cases cited so far only hint at the extent of the problem and the

number of people who believe that they have been the victims of predatory lending.

In many cases these people were desperate to stem the losses and salvage whatever

they could from the financial mess they found themselves in and in particular to save

or regain their family home. Their trust in the banking system has been shattered and

their confidence in ASIC as an effective regulator destroyed.

Loan application forms—anomalies and discrepancies

5.53 The committee has recounted the stories of many borrowers who found

themselves in dire circumstances because of irresponsible lending practices.

In account after account, submitters expressed their shock at discovering that their

forms had 'been manipulated to suit the purpose of the loan'.71

5.54 The stories of altered loan application forms are hard to believe. The reported

extent of these manufactured application forms raises many questions about why the

practice was allowed to continue seemingly unchecked for so many years. As noted

earlier, a 2003 ASIC-commissioned report referred to this matter as did both APRA in

2003 and the RBA in 2004. Yet the practice continued for several more years until

finally the states agreed to refer powers to the Commonwealth and new credit laws

were passed.

5.55 Many who obtained their loan through a broker indicated that the lender did

not contact the borrower to check the details in the loan application form or take

measures to verify the accuracy of the information. They claim that had the lender

done so, it would not have approved the loan.72

Some were convinced that the banks

were required by law to ensure the affordability of the loan: that it was the bank's

responsibility to confirm that the information contained in the loan application form

was accurate.73

One submitter stated that the bank 'did not protect us by

communicating with us or checking any of the paperwork as a prudent lender would

be expected to do...'74

70 Mr Timothy Chapleo, Submission 7, p. 1.

71 Name withheld, Submission 12, p. 2. See also Financial Ombudsman Service, Determination:

Case number 323234, 17 December 2013, p. 3.

72 Submissions 27, 28 and 29.



5.56 In this regard, it should be noted that the 2003 Code of Banking Practice

states clearly that before a bank offers or gives a credit facility, or increases an

existing credit facility, it would 'exercise the care and skill of a diligent and prudent

banker' in selecting and applying credit assessment methods and in forming an

opinion about the borrower's ability to repay it.75

Loan calculator

5.57 It would appear that in most, but not all, cases before the committee, it was

the broker who altered or inserted incorrect information in the loan application form.

Many of the borrowers argued that the broker did not act on their behalf but was in

effect the agent of the bank. In their view, the lender paid the broker, who often had

access to the lender's computer systems, and 'was instructed by the lender on how

to get various loans across the line and operated under the lender's systems and

instructions'.76

Ms Brailey cited the use of a service calculator as evidence that brokers

were indeed agents of the banks. She stated:

I want to highlight that everything is predicated on a service calculator…

All 11,000 brokers have a screen in front of them. They must put the base

income in the top corner. At the bottom, it spits out a figure. The broker is

then taught by the business development managers at bank level. They

come out to your office and teach you how to use it. They ask the broker to

write that figure on the loan application form in their own handwriting. So

he or she writes $180,000, when the figure was $50,000. That, in a nutshell,

is how that fudged figure emerges.

The service calculator is a tool—it is a weapon.77

5.58 ASIC argued, however, that ultimately the person who entered the incorrect

information or tampered with the loan application form was the one responsible for

the act:

If an individual, whether a finance broker or a borrower, falsifies

information in order to make a loan fit a calculator, it is the individual who

has engaged in misconduct, not the person who has made the calculator

available.78

5.59 That is, the lender was not held responsible for the misuse of the calculator by

the broker, even though the lender may have supplied the calculator and provided

advice and instruction on its use.

5.60 While the courts have tended to accept that brokers were not agents of the

banks, the lending institutions do not come out of this period blameless. The banks

75 Australian Bankers' Association, Code of Banking Practice 2003, subsection 25.1.


77 Proof Committee Hansard, 20 February 2014, p. 46.


and other lending institutions must have been aware of the dubious practices

employed by some of the brokers arranging loans but chose to ignore them. Moreover,

in some cases, the lending institutions clearly failed not only to exercise the skill and

care of a diligent and prudent banker but were negligent even complicit in deceiving

their customers. It should be noted that in its 2009 report on financial services and

products, the Parliamentary Joint Committee on Corporations and Financial Services

expressed some doubt about the degree to which banks acted 'ethically, appropriately,

morally and prudently in their decisions to grant loans to some Storm customers'.79

Committee view

5.61 It would seem that on the face of the evidence, some lenders, irrespective of

the loan application form, should not have approved certain loans: they were

unaffordable and likely to fail. In other cases, again irrespective of the loan

application form, the borrower should have taken care before signing the actual loan

contract to make sure that the repayments were sustainable and would not jeopardise

the assets securing the loan.

5.62 Even so, the fact that this practice of manipulating information and faking

signatures was allowed to continue for so long reflects badly on the brokers, the

lenders and the regulator. It highlights the vulnerability of unwary and trusting

borrowers, who were taken advantage of by unprincipled and self-interested brokers

and lenders.

ASIC's role and limitations

5.63 Many submitters were of the view that the regulator did little to prevent

predatory lending. ASIC informed the committee, however, that it made 'strategic use

of the jurisdiction it did have'. It took court action; provided guidance to industry in

areas where practice was poor; developed resources, tools and information for

consumers of credit; and undertook surveillance activities where it saw problems in

the industry. Moreover, ASIC endeavoured to understand the causes and effects.80

For example, ASIC took the following action with regard to deceptive and misleading

conduct:

2004—accepted an enforceable undertaking from mortgage broker Structured

Solutions;

2006—took civil and criminal action against mortgage broker Tonadale Pty

Ltd and Kelvin Sheers;

2006—obtained orders against mortgage brokers Sample & Partners Pty Ltd;

and

79 Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into financial

products and services in Australia, November 2009, Parliamentary Paper No. 321/2009, p. 35.


2009—took action against Whyte Corporation Pty Ltd.81

5.64 As well as citing these few cases, ASIC drew attention to the difficulty of

bringing the lender to account for the misconduct of the broker. It noted that ASIC

intervened in the Tonto Home Loans Australia Pty Ltd matter to argue that, 'in the

circumstances, the brokers should be considered agents of the lender and that the

actions of the lender were unconscionable'. The courts did not accept ASIC's

submissions. ASIC explained:

The Supreme Court of New South Wales Court of Appeal ultimately held

that the broker was not the agent of the lender and, as a result, that the

lender's conduct was not unconscionable, but that the relevant contracts

were unjust under state legislation.82

5.65 ASIC informed the committee that:

The courts have found that, barring special circumstances, a mortgage

broker is the agent of the borrower, and not the lender. This poses

significant challenges for establishing unconscionable conduct where a

broker is involved in the transaction, because:

the broker's actions are attributed to the borrower. For instance, if the

broker has manipulated the loan application, unbeknownst to the

borrower and the lender, the action is taken to be that of the borrower,

and not the lender; and

the knowledge of a broker cannot necessarily be imputed to a lender.

In these circumstances, as the lender typically deals with the broker

and may not have any direct contact with the borrower, it is difficult

to establish that the lender has sufficient knowledge of the borrower's

circumstances for the lender's conduct to be unconscionable.83

5.66 It appeared to ASIC that dishonest or fraudulent conduct had been 'more

commonly found in relation to mortgage and finance brokers rather than lenders'.84

The committee was told, however, that even where bank offers were alleged to have

fabricated the loan forms, ASIC was reluctant to take action.85

In specific reference to

the provision on unconscionable conduct in the ASIC Act, ASIC explained that as the

provision covers a broad range of situations, the courts have 'generally applied it

to address the most extreme classes of conduct in all cases'. It explained further:

…the prohibition therefore does not provide a nuanced remedy that

addresses the complexities of a transaction where problems may arise


82 See ASIC, 'ASIC intervenes in low doc loan proceedings', Media Release, no. 09-39AD,

6 March 2009.



85 Ms Rosie Cornell, Submission 285.

because of the different interests of a consumer, a provider of an investment

product, a lender and any finance broker.86

5.67 ASIC noted further that borrowers who elected to pursue matters in court

faced the same barriers as ASIC in establishing that a lender's conduct was

unconscionable.87

Additional difficulties borrowers could face when taking action

against the broker were also recognised by ASIC:

Although a borrower may have a remedy against a finance broker for

unconscionable conduct, the ability to obtain such a remedy, and value

thereof, may be reduced in circumstances where the borrower is in financial

hardship, due to an inability to repay the loan, and may be facing separate

enforcement or legal action in relation to their home.88

5.68 Thus, under the laws that existed before 2010, the people who were deceived

by their brokers and abandoned by their lenders, had little prospect of success in

the courts even though a lay person would clearly have understood the conduct of the

broker or lender as unconscionable.

Fraud

5.69 As mentioned earlier, most complaints centred on the loan application form

and the inaction by ASIC to deal with what the complainant considered was blatant

fraud. In responding to alleged fraud occurring before the commencement of the

National Credit Act, ASIC advised that the relevant state and territory police forces

were the 'more appropriate authorities to investigate'. It noted that state and territory

police had investigated some matters.89

ASIC stated further that it appeared that

dishonest or fraudulent conduct had been 'more commonly found in relation to

mortgage and finance brokers rather than lenders'.90

Guidance, education and warning notices

5.70 ASIC also informed the committee that it offered guidance for consumers

through financial literacy material available on its website on managing credit and

loans and debt. It also worked with industry, consumer groups and the external dispute

resolutions schemes to improve practices. ASIC cited its work in fostering:

the development of a code of practice applicable to brokers and non-bank

lenders; and

86 ASIC, answer to question on notice, no. 12 (received 21 May 2014), p. 4.





enhancements to the codes of practice of both the banking industry and

mutual sector.91

5.71 As noted earlier, however, the banks already had a Code of Banking Practice

requiring them to 'exercise the care and skill of a diligent and prudent banker'.92

Committee view

5.72 ASIC had available to it persuasive and less formal measures to stop

unscrupulous practices. In this regard, the committee believes that ASIC did not take

the opportunity to intervene in a far more direct and public way. It did not send a

strong message regarding its concerns about irresponsible lending practices to lenders.

Nor did ASIC do enough to alert Australian consumers to the risks associated with

low doc loans, their vulnerability to irresponsible or even fraudulent activity, and of

the need to protect their own interests. Such early and decisive publicity may have

educated the community about ASIC's limited ability to protect their interests and

minimised the damage.

Individual complaints and ASIC's responsibility

5.73 The CCLC argued that the role of a large national regulator is 'to respond to

systemic and serious breaches of law within the industry that it regulates'. According

to the CCLC, the expectation that ASIC would investigate and take action in

complaints prior to the new credit laws was 'unreasonable':

ASIC cannot be expected to resolve each individual consumer dispute, nor

would it be in the public interest. ASIC should carefully consider how to

respond to all potential breaches of the law, but should not necessarily

undertake a formal investigation of every individual complaint that comes

to its attention.93

5.74 Furthermore, the CCLC highlighted that even in the face of 'extensive poor

conduct' in lending in Australia, the laws then were limited and cases 'very difficult

to win'.94

It stated:

…prosecuting a case in relation to the conduct of an individual entity under

the ASIC Act (without the credit laws) is a resource intensive exercise and

will not necessarily result in the players being banned from the industry

now. It will certainly not turn back time, nor enable consumers to keep

assets they could not afford in the first place, or to retain assets used for

security when the funds have been expended for the consumer's benefit.95


92 See paragraph 5.56.

93 CCLC, Submission 194, p. 16.

94 Mrs Karen Cox, Coordinator, CCLC, Proof Committee Hansard, 20 February 2014, p. 43.


5.75 According to the CCLC, 'expending resources investigating conduct that has

already been identified as a problem and has been the subject of major law reform is

also clearly of limited value'.96

5.76 The committee understands that ASIC's role between 2002 and 2010 when the

new credit laws came into force was limited. The fact remains, however, and is a

potent lesson for the regulator, that despite all the warning signs, ASIC remained in

the background while borrowers found themselves exposed to unscrupulous lending

practices and at risk of losing their homes and life savings.

Conclusion

5.77 The committee understands that ASIC receives a large number of complaints

and reports of alleged wrongdoing and that it cannot possibly deal with such a large

volume of individual complaints. But it also believes that individual complaints can

provide early markers of a broader problem that ASIC should monitor and address.

In this particular case of irresponsible lending, each single complaint was

symptomatic of a more widespread and growing problem.

5.78 The one compelling lesson to be learnt from the many cases of predatory

lending that occurred between 2002 and 2010 is that ASIC must be more proactive

and more assertive in stepping forward and exposing poor practices as soon as they

surface. The committee concludes that ASIC should have done more to:

alert the public to the dangers of irresponsible lending and of the practices of

some brokers that put their clients' interests at risk;

inform consumers about the need to protect their interests when entering into

a loan: to make sure that it was affordable and warn them of the pitfalls of

particular loans such as low doc loans;

educate the public about the importance of requesting and reading key

documents and the dangers of signing incomplete documents;

identify that a systemic problem was emerging or already entrenched in the

industry that needed decisive action to prevent further consumer harm;

take a stand against and investigate fraudulent activity such as the allegations

of doctored loan documents including forged signatures and fabricated

information, and of possible unconscionable conduct (enticing vulnerable

people to take out unaffordable loans);

engage the banks in serious conversation about their duty to 'exercise the care

and skill of a diligent and prudent banker', as stated in subsection 25.1 of the

Code of Banking Practice, and urge them to adhere to this undertaking;


join forces with ASIC-approved external dispute resolution schemes to

combat the misuse of loan service calculators and loan application forms, and

any behaviour in the credit industry that went to unconscionable conduct; and

improve the way it conversed with borrowers who were seeking the

regulator's assistance.

5.79 Some recommendations that would have flowed naturally from the evidence

presented in this chapter have been made redundant by recent reforms. There are

others, however, that remain relevant but are developed and appear in later chapters.

Noting ASIC's existing work on financial literacy, the committee, for the moment,

makes the following recommendation.

Recommendation 1

5.80 The committee recommends that ASIC develop a multi-pronged

campaign to educate retail customers about the care they need to take when

entering into a financial transaction and where they can find affordable and

independent advice or assistance when they find themselves in difficulties

because of that transaction.

New credit laws

5.81 Due to the national credit reforms implemented in 2010, many of the

unscrupulous practices identified in this chapter should now be unlawful and people

involved in the provision of credit, including intermediaries such as brokers, subject to

tighter regulation. In the following chapter, the committee considers the new credit

laws and their effectiveness in protecting consumers from irresponsible lending

practices.

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